Uninsured and Underinsured Motorists: Trends In Policy and Enforcement

Transcription

1 Uninsured and Underinsured Motorists: Trends In Policy and Enforcement FINAL REPORT 548 Prepared by: Lisa Markkula Marketing Intelligence, LLC 1636 N. Swan Rd., Ste. 102 Tucson, AZ Telephone: (520) Facsimile: (520) JUNE 2004 Prepared for: Arizona Department of Transportation 206 South 17th Avenue Phoenix, Arizona in cooperation with U.S. Department of Transportation Federal Highway Administration

2 The contents of the report reflect the views of the authors who are responsible for the facts and the accuracy of the data presented herein. The contents do not necessarily reflect the official views or policies of the Arizona Department of Transportation or the Federal Highway Administration. This report does not constitute a standard, specification, or regulation. Trade or manufacturers names which may appear herein are cited only because they are considered essential to the objectives of the report. The United States Government and The State of Arizona do not endorse products or manufacturers. ACKNOWLEDGEMENTS The author would like to thank Project Manager John Semmens, of the Arizona Department of Transportation, for his good will and guidance, Dr. Kapil Jain and Chris Baker, of Marketing Intelligence, for their support and feedback, and the many agency staff who took time to respond to the surveys for this report. Such research would be impossible without the gracious cooperation of willing participants.

3 1. Report No. FHWA-AZ Technical Report Documentation Page 2. Government Accession No. 3. Recipient s Catalog No. 4. Title and Subtitle 5. Report Date June 2004 Uninsured and Underinsured Motorists: Trends In Policy and Enforcement 7. Authors Lisa Markkula 6. Performing Organization Code 8. Performing Organization Report No. 9. Performing Organization Name and Address 10. Work Unit No. Marketing Intelligence, LLC, 1636 N. Swan Rd., Ste. 102, Tucson, AZ Sponsoring Agency Name and Address ARIZONA DEPARTMENT OF TRANSPORTATION 206 S. 17TH AVENUE PHOENIX, ARIZONA Project Manager: John Semmens 11. Contract or Grant No. SPR-PL-1-(61) Type of Report & Period Covered 14. Sponsoring Agency Code 15. Supplementary Notes Prepared in cooperation with the United States Department of Transportation, Federal Highway Administration 16. Abstract The Insurance Research Council (IRC, an industry research group) estimated Arizona s uninsured motorist rate at an average 16% for the years 1995 to The Arizona Department of Transportation (ADOT) puts the number today at half that figure. Depending on the number used, the economic costs of motor vehicle accidents involving uninsured motorists in Arizona in 2002 were an estimated $ million to $ million. Of equal concern, motorists with minimum motor vehicle liability insurance create, on average, an estimated $37,100 in economic costs for each person they injure who is incapacitated, plus an estimated $2,200 for each person they injure who is not incapacitated after policy limits have been exhausted. In fact, if every Arizona driver were insured, but had just $15,000 per person bodily injury liability limits, injured accident victims would have a one in ten chance that over 70% of the economic costs of their injuries would not be covered by insurance. According to a 1994 study by the National Highway Traffic Safety Administration (NHTSA), an estimated 40.1% of the total economic costs of motor vehicle accidents in Arizona are passed on to the public and the state. Uninsured and underinsured motorists are major contributors to those costs. This report examines what states have done and what different interest groups have put forth to ensure the availability of compensation to accident victims. 17. Key Words vehicle registration, vehicle fees 19. Security Classification 20. Security Classification Unclassified Unclassified 18. Distribution Statement Document is available to the United States public through the National Technical Information Service, Springfield, Virginia No. of Pages Price 23. Registrant s Seal

4 SI* (MODERN METRIC) CONVERSION FACTORS APPROXIMATE CONVERSIONS TO SI UNITS APPROXIMATE CONVERSIONS FROM SI UNITS Symbol When You Know Multiply By To Find Symbol Symbol When You Know Multiply By To Find Symbol LENGTH LENGTH in inches 25.4 millimeters mm mm millimeters inches in ft feet meters m m meters 3.28 feet ft yd yards meters m m meters 1.09 yards yd mi miles 1.61 kilometers km km kilometers miles mi AREA in 2 square inches square millimeters mm 2 mm 2 Square millimeters square inches in 2 ft 2 square feet square meters m 2 m 2 Square meters square feet ft 2 yd 2 square yards square meters m 2 m 2 Square meters square yards yd 2 ac acres hectares ha ha hectares 2.47 acres ac mi 2 square miles 2.59 square kilometers km 2 km 2 Square kilometers square miles mi 2 AREA VOLUME VOLUME fl oz fluid ounces milliliters ml ml milliliters fluid ounces fl oz gal gallons liters L L liters gallons gal ft 3 cubic feet cubic meters m 3 m 3 Cubic meters cubic feet ft 3 yd 3 cubic yards cubic meters m 3 m 3 Cubic meters cubic yards yd 3 NOTE: Volumes greater than 1000L shall be shown in m 3. MASS MASS oz ounces grams g g grams ounces oz lb pounds kilograms kg kg kilograms pounds lb T short tons (2000lb) megagrams (or metric ton ) º F Fahrenheit temperature mg (or t ) Mg megagrams (or metric ton ) TEMPERATURE (exact) TEMPERATURE (exact) 5(F-32)/9 or (F-32)/1.8 Celsius temperature º C short tons (2000lb) T º C Celsius temperature 1.8C + 32 Fahrenheit temperature ILLUMINATION ILLUMINATION fc foot candles lux lx lx lux foot-candles fc fl foot-lamberts candela/m 2 cd/m 2 cd/m 2 candela/m foot-lamberts fl FORCE AND PRESSURE OR STRESS FORCE AND PRESSURE OR STRESS lbf poundforce 4.45 newtons N N newtons poundforce lbf lbf/in 2 poundforce per square inch 6.89 kilopascals kpa kpa kilopascals poundforce per square inch lbf/in 2 SI is the symbol for the International System of Units. Appropriate rounding should be made to comply with Section 4 of ASTM E380 º F

5 TABLE OF CONTENTS Executive summary... 1 Introduction... 5 Legal Review... 8 Literature Review Quantitative Research Conclusions and Recommendations Appendix Bibliography

6

7 Figure 1. Figure 2. Figure 3. Figure 4. Figure 5. Figure 6. Figure 7. Figure 8. Figure 9. Figure 10. Figure 11. Figure 12. Figure 13. Figure 14. Figure 15 Figure 16. Figure 17. Figure 18. Figure 19. Figure 20. Figure 21. Figure 22. Figure 23. Figure 24. Figure 25. Figure 26. Figure 27. Figure 28. Figure 29. Figure 30. Figure 31. Figure 32. Figure 33. Figure 34. Figure 35. Figure 36. Figure 37. LIST OF FIGURES Minimum Per Person Liability Limits... Average Uninsured Motorist Rate By Coverage Level. of Uninsured Motorist Notices Issued By Method, Virginia Minimum Per Person Liability Limits... of Injured Persons By Injury Severity.. of Total Economic Cost By Crash Severity. Correlation Between Minority Population and Uninsured Motorist Rate License Plate Cover Advertisement.... of Uninsured Motorist Notices Issued By Method, Virginia IRC Estimated Uninsured Motorist Rate Average By State... Estimated Number of Uninsured Private Vehicles By State..... Non-Citizen Driver s License Issued... Driver s License Technologies Used. Respondent Perceptions of Frequency: Checking Proof of Insurance and Applying Penalties... Fines For Driving Without Insurance Per III... Fines For Driving Without Insurance Per Respondents: 1 st, 2 nd and 3 rd Offenses. Jail Days Per III... Jail Days Per Respondents: 1 st, 2 nd and 3 rd Offenses. Days License Or Registration Suspended Per III..... Days License Or Registration Suspended Per Respondents: 1 st, 2 nd and 3 rd Offenses. Fees to Reinstate License, Registration and Plates Per Respondents... Adoption of Database Technology... Insurer Reporting Requirements Comparison Cycles Law Enforcement and Regulatory Access... Violation Info in Database. Enforcement Letters Sent To. Enforcement Timelines and Compliance Estimates.. Compulsory UM and UIM Per Respondents. 100 Compulsory UM and UIM Per III. 100 UM Premiums Same Statewide? Types of Damages Covered By UM. 102 Involuntary Market Requires Insurer Rejection? Involuntary Market Requires Good Payment History?. 103 Estimated UM and UIM Average Annual Premiums 103 Premium Prepayment Required For Violators Allow Surcharges On Previously Uninsured Motorists?

8 Figure 38. Figure 39. Figure 40. Figure 41. Figure 42. Average Uninsured Motorist Rate By Coverage Level. Coverage and Expected Uninsured Motorist Rate... Minority Population and Expected Uninsured Motorist Rate... Coverage and Expected Average amount paid out for damages covered by liability insurance. Urban Population and Expected Average amount paid out for damages covered by liability insurance

9 LIST OF TABLES Table 1. Table 2. Table 3. Table 4. Table 5. Table 6. Table 7. Table 8. Table 9. Table 10. Table 11. Table 12. Table 13. Table 14. Table 15. Table 16. Table 17. Table 18. Table 19. Correlation With IRC % UM Average.... Minimum Per Person Liability Limits By State... Estimated Average Economic Costs of Arizona Motor Vehicle Accidents Characteristics of Uninsured Motorists..... New Jersey Uninsured Motorists By Income.... Industry Financial Data on Private Passenger Auto Insurance. Prohibited Rating Factors By State... Uninsured Motorist Enforcement By Method, Virginia New York State Insurer Reporting Deadlines By Event, Survey Respondents.. Comparison of Respondent and IRC Uninsured Motorist Estimates... Source of Respondent Uninsured Motorist Estimates... Database Cost Per Registered Vehicle.. Database History and Performance... Driving-Age Population Living Below Poverty Level in Los Angeles and San Francisco Counties That Could Be Served By Active LCLB Policies... California Registered Private Vehicles That Could Be Served By Active LCLB Policies Correlation With IRC % UM Average. 107 Correlation With III 2000 Average amount paid out for damages covered by liability insurance Estimated Average UM and UIM Premiums

10 GLOSSARY OF ACCRONYMS AAA AAMVA ACLU ADOI ADOT ARP ARS ATRC BI BTS DES DMV DUI FARS GTA IICMVA IIES III IRC IRS ISO JAKE JSTOR JUA LCLB MVA MVD NHTS NJ OCR PPA RF RSA SPSS U.S. DOT UIM UM VIN Automobile Association of America American Association of Motor Vehicle Administrators American Civil Liberties Union Arizona Department of Insurance Arizona Department of Transportation Assigned Risk Pool Arizona Revised Statutes Arizona Transportation Research Center Bodily Injury Bureau of Transportation Statistics Data Encryption Standard Department of Motor Vehicles Driving Under the Influence Fatal Accident Reporting System Georgia Technology Authority Insurance Industry Committee on Motor Vehicle Administration Insurance Information and Enforcement System Insurance Information Institute Insurance Research Council Internal Revenue Service International Organization for Standardization Jointly Administered Knowledge Environment Journal Storage Joint Underwriting Association Low-Cost/Low-Benifit Motor Vehicle Administration Motor Vehicle Division National Highway Transportation Safety Administration New Jersey Optical Character Recognition Private Passenger Automobile Radio Frequency Rivest, Shamir, Adleman Statistical Package for the Social Sciences U.S. Department of Transportation Underinsured Motorist Uninsured Motorist Vehicle Identification Number

11 Executive summary The Insurance Research Council (IRC), an industry research group, estimated Arizona s uninsured motorist (UM) rate at an average 16% for the years 1995 to The Arizona Department of Transportation (ADOT) puts the number today at half that figure. Depending on the number used, the economic costs of motor vehicle accidents involving uninsured motorists in Arizona in 2002 were an estimated $ million to $ million. Of equal concern, motorists with minimum motor vehicle liability insurance create, on average, an estimated $37,100 in economic costs for each person they injure who is incapacitated, plus an estimated $2,200 for each person they injure who is not incapacitated after policy limits have been exhausted. $60,000 $50,000 $40,000 $30,000 $20,000 $10,000 10% 14% 22% 48% In fact, if every Arizona driver were insured, but had just $15,000 per person bodily injury liability limits, injured accident victims would have a one in 10 chance that over 70% of the economic costs of their injuries would not be covered by insurance. 1 According to a 1994 study $0 by the National Highway Figure 1. Minimum Per Person Liability Limits Traffic Safety Administration (NHTSA), an estimated 40.1% of the total economic costs of motor vehicle accidents in Arizona are passed on to the public and the state. 2 Uninsured and underinsured motorists are major contributors to those costs. This report examines what states have done and what different interest groups have put forth to ensure the availability of compensation to accident victims. 6% 1 Breakdown of injured persons was calculated from ADOT data. 2 The Economic Cost of Motor Vehicle Crashes, 1994, Blincoe, Lawrence J.; National Highway Traffic Safety Administration, U.S. Dept. of Transportation 1

12 KEY FINDINGS A study published in the Journal of Insurance Regulation found that compulsory insurance laws with higher minimum liability limits, higher fines and requirements that insurers notify states when policyholders cancel coverage are associated with lower uninsured motorist rates. Several other studies have found that as the cost of insurance goes up, so does the uninsured motorist rate. Figure 2 below shows the average uninsured motorist percentage as estimated by the IRC at different minimum bodily injury liability limits (i.e., $10,000/20,000, $15,000/30,000, etc.). 35% 30% Expected % UM 25% 20% 15% 10% 17.5% 16.6% 13.2% 12.0% 5% 0% 10/20 15/30 20/40 25/50 Minimum Bodily Injury Liability Limits Figure 2. Average Uninsured Motorist Rate By Coverage Level The number of uninsured motorists has little effect on insurance rates. Even cutting the uninsured motorist rate in half a significant accomplishment would reduce overall premiums less than 10%. Arizona s average cost for private passenger automobile (PPA) liability insurance in 2000 was the 14 th highest in the nation, yet its PPA loss ratio was much lower than the national average making the state relatively more profitable for insurers. In 2000, Arizona s PPA liability loss ratio was 67.52%. The national average was. 75.2%. According to the Insurance Information Institute (III), an industry research group, property damage payments in general account for 50% of premium dollars, with property damage liability payments (i.e., damage to property owned by others caused by the policy holder) accounting for 19%. Insurers largest expense is commissions and other selling costs, at 16%. Other select costs are: Claimants lawyers fees: 6.7% Insurers lawyers fees: 6.3% Payments for economic damages: 12% Payments for non-economic damages: 6% Number estimates of uninsured motorists are unreliable. The most reliable method, database matching of insurance with registration records, is not widely used. 2

13 Of the many variables examined for this report, those that correlated with the IRC uninsured motorist rate are listed in Table 1 below in rank order from strongest to weakest. A plus (+) sign indicates that the two rise and fall together. A minus ( ) sign indicates that an increase in one is accompanied by a decrease in the other (-). Significance is the level of statistical significance of the relationship. (For Statistical Package for the Social Sciences (SPSS) output, see Output 1, Appendix.) Table 1. Correlation With IRC % Uninsured Motorist Average Rank Variable Relationship Significance 1 Uninsured Motorist Offer Language Specified - 99% Census % of Population Minority + 99% 3 Underinsured Motorist (UIM) Offer Language Specified - 95% 4 Reinstate Registration Charge + 95% 5 Reinstate License Charge + 95% 6 Insurance Information Institute Per Person Minimum Insurance Information Institute Per Accident Minimum 7 Insurance Information Institute 2000 Voluntary Insured Private Passenger Automobile Bureau of Transportation Statistics (BTS) registered private truck % 99% + 99% + 99% BTS registered private auto + 95% 11 Insurance Information Institute Property Minimum - 95% 12 Insurance Information Institute UM Compulsory - 95% Census % of Population Urban + 95% Uninsured motorists are more likely to be young men, Hispanic or African American, with more vehicles but less education, income or stability than insured motorists. They are also more likely than not to own at least one insured vehicle. At least one study found potential insurer discrimination against low-income and minority motorists. Motorists living in mostly minority zip codes were two to three times more likely to have been denied coverage and wind up in the nonstandard or involuntary markets than motorists living in mostly nonminority zip codes, even after controlling for income, and even though minority drivers were no more likely to have been in motor vehicle accidents than nonminority drivers. Both legal and illegal immigrants may be unable to buy insurance if they are unable to obtain a driver s license. Some states accept identification other than a Social Security Number, such as a tax ID number issued by the IRS. States also issue driver s licenses that identify the holder as a noncitizen. Noncitizen driver s licenses have been politically contentious in California, which has a large immigrant population and a vocal anti-immigration movement. 3

14 Low-income residents are most affected by uninsured motorists because they are less likely to have collision coverage or uninsured motorist coverage; or disability, health or life insurance. Requirements to provide proof of insurance at registration can easily be thwarted by buying insurance, registering, then canceling insurance. Insurance verification databases, however, have cut short the time that motorists can get away with this. Properly designed and executed, database systems are overwhelmingly superior to other methods of catching uninsured motorists. (See Figure 3 below.) Database 99.0% Other 1.0% Figure 3. of Uninsured Motorist Notices Issued By Method, Virginia 2002 KEY RECOMMENDATIONS Law enforcement notification 0.5% Suspected uninsured accident 0.4% Citizen information/police accident reports 0.2% Some penalties prevent or deter uninsured motorists from becoming insured, such as insurer surcharges which can be as high as 30%. Insurers may also decline coverage to those previously uninsured. Some states have banned these practices. Increase motor vehicle liability insurance requirements in one or more of the following ways: Raise per person and per accident minimum insurance requirements Double per person minimum insurance requirements Make uninsured motorist coverage compulsory Make underinsured motorist coverage compulsory Work to improve the insurance verification database: Include data needed for matching, such as driver s license, named insureds, title and commercial motor carrier Vehicle Identification Number (VIN). Provide prior violation information to law enforcement agencies and courts. Notify owners who do not reregister their vehicles that they are responsible for registration and late fees until they turn in plates, transfer title, or provide proof the vehicle is registered in another state. Remove obstacles to becoming insured: Prohibit insurers from declining coverage or imposing surcharges on previously uninsured motorists. 4

15 Introduction BACKGROUND This report was prepared for the Arizona Department of Transportation (ADOT), to explore options for dealing with the problems of uninsured and underinsured motorists. Reducing the numbers of uninsured and underinsured motorists would shift costs: From the state and the public to insurers From health insurers to motor vehicle liability insurers From victims to at-fault drivers It would also increase coverage available to victims of motor vehicle accidents. All of these outcomes are considered desirable. An additional, and potentially competing, goal is to have motor vehicle liability insurance be as inexpensive as possible. Although maybe not a position insurers would support, this would be a desirable outcome for the public and the state. SCOPE Funding for this research project was $15,000. Reviews of academic, government and industry literature as well as Arizona statutes and regulations were conducted. Three surveys were developed: two to state motor vehicle departments and one to state departments of insurance. Final deliverables are this report and a separate PowerPoint presentation. METHODOLOGY The Project Manager was John Semmens of the ADOT Arizona Transportation Research Center (ATRC). The Project Researcher was Lisa Markkula of Marketing Intelligence, LLC. Literature review included academic journals, business association and company websites, government reports, industry publications, newspapers and publicly available data. Principal sources of secondary data include the Arizona Department of Transportation, the Bureau of Transportation Statistics (BTS), the Insurance Information Institute (III), the Insurance Research Council (IRC), the National Highway Transportation Safety Administration (NHTSA) and the United States Census. A bibliography is attached. Literature searches used the United States Department of Transportation s TRIS Online, the Library of Congress Thomas system, the University of Arizona s Sabio information gateway, Lexis-Nexis (a law related database), JSTOR (an electronic journals database), 5

16 JAKE (a database index of other databases), Google, EBSCO (the Elton B. Stephens Company general journals database), ABI/Inform (an academic and business publications database), and other sources/search engines. Legal searches used Arizona s ALIS Online and the University of Arizona s law library. From issues raised in the literature review, survey questions were developed and submitted for approval prior to distribution via . The survey was distributed to various state agencies. Survey results were analyzed alongside secondary data using descriptive statistics, frequencies, nonparametric testing methods and simple and multiple regression. Quantitative analysis had three goals: Provide a picture of what states are doing and have done. Look for variables that move with or counter to the uninsured motorist rate and for relationships between them. Look for variables that move with or counter to liability expenditures and for relationships between them. OVERVIEW This report has seven sections: Executive Summary Introduction Legal Review Literature Review Quantitative Analysis Conclusions and Recommendations Appendix The literature review section contains the most in-depth discussions of issues, including: Compulsory insurance Uninsured motorists cost to the state Characteristics of uninsured motorists Estimating the number of uninsured Immigration issues Factors affecting compliance with compulsory insurance laws Factors affecting the cost of motor vehicle liability insurance No-fault and choice vs. the tort system Equity issues Penalties Enforcement New technologies for use in enforcement Database tracking of insurance status for use in enforcement Alternative funding mechanisms 6

17 The conclusions and recommendations section makes suggestions for consideration and briefly discusses their costs and benefits. The Appendix contains statistical output from Statistical Package for the Social Sciences (SPSS), a statistical software package, and other attachments too detailed to include in the body of the report. 7

18 Legal Review MOTOR VEHICLE INSURANCE IN ARIZONA In Arizona, drivers are financially responsible for accidents they cause. Motor vehicle liability insurance protects against this risk. With few exceptions, state law requires owners of vehicles operated on Arizona highways to maintain liability insurance or deposit $40,000 with the Arizona Treasurer. To meet the requirements, a motor vehicle liability policy must provide coverage in the following amounts: $15,000 for bodily injury or death of one person $30,000 for bodily injury or death of two or more people (per accident). $10,000 for property damage The remainder of this report will use the term "15/30/10" to refer to these coverage amounts. This report will describe other liability coverage rates in a similar fashion, e.g., "X/Y/Z" (or in some cases, simply "X/Y" to refer to the first two liability categories). In policies with higher limits, only the first 15/30/10 is the motor vehicle liability policy ; the rest is additional or excess coverage. Commercial motor carriers are required to maintain higher motor vehicle liability limits, which vary according to weight, passenger capacity, and cargo. Failure to comply with financial responsibility requirements exposes offenders to civil penalties. Liability insurance protects the public. Other coverage protects the insured. Uninsured motorist coverage (UM) applies when an at-fault uninsured motorist injures occupants of a vehicle with uninsured motorist coverage. If the at-fault driver is insured, but coverage is insufficient to compensate for damages, then underinsured motorist coverage (UIM) applies. In accidents where more than one policy provides coverage, the policy that covers the vehicle is considered primary and policies that cover the driver or passengers are secondary or excess. Primary coverage must pay its limits before secondary coverage can apply. uninsured motorist coverage is a primary coverage, but underinsured motorist coverage is a secondary coverage. In fact, underinsured motorist coverage pays only after all other available coverage secondary as well as primary has been exhausted. uninsured motorist and underinsured motorist coverage in the same policy cannot be stacked. One or the other may apply, but not both. Liability insurance, uninsured motorist coverage and underinsured motorist coverage are all based on fault. They pay nothing to those 100% responsible for causing an accident. 8

19 No-fault insurance is not available in Arizona, but some types of coverage do provide compensation regardless of who caused the accident. Medical payments coverage ( med pay ) pays medical bills for covered persons. Collision and comprehensive coverages pay repair or replacement costs for covered vehicles. UNINSURED AND UNDERINSURED MOTORISTS An uninsured motorist is a legal construct determined by statute, policy language, and case law. It varies state to state and even policy to policy. Because people don t always drive or ride in their own vehicles, motor vehicle liability insurance, uninsured motorist and underinsured motorist coverage can follow the insured, the vehicle or both. Drivers of uninsured vehicles may be insured under their own policies. Passengers in uninsured vehicles may be insured under the driver s policy or under their own policies. Denial of coverage or insurer insolvency creates uninsured motorists. Another culprit is the hit-and-run driver. If an at-fault driver or vehicle cannot be identified, an uninsured motorist is considered to have caused the accident although both driver and vehicle may have been insured. Thus, uninsured motorists include: People without insurance driving vehicles that are not insured. People with insurance driving vehicles they own that are not insured. People driving vehicles where the person and/or the vehicle is insured, but coverage is denied. People driving vehicles where the person and/or the vehicle is insured, but the insurer is insolvent. People who cause an accident and whose identities are unknown, regardless of whether they or the vehicle are insured (hit-and-run drivers). If state law determines who is uninsured, then settlement or award determines who is underinsured. Accident victims forego the right to recover underinsured motorist claims if they settle for less than policy limits with a negligent party. At that point, no matter how severe their injuries, they are no longer underinsured under the terms of the policy. From a public policy standpoint, however, underinsured motorists include people with insurance insufficient to: Protect their assets. Compensate others for property damage, bodily injury, or death for which they are at fault. Compensate themselves, their passengers, or their heirs for property damage, bodily injury or death for which others are at fault. 9

20 REGULATORY AND ENFORCEMENT AGENCIES In Arizona, the following agencies and entities are involved in ensuring that financial responsibility requirements are met: Arizona Department of Transportation (ADOT). Motor Vehicle Division (MVD, a division of ADOT). Arizona Department of Insurance (ADOI). Insurers. Law enforcement agencies. Courts. MVD requires proof of insurance at vehicle registration and denies registration unless proof is presented. It also maintains a database of registration and insurance information and issues enforcement letters to registered owners of vehicles suspected of being uninsured, notifying them that their registrations and drivers licenses will be suspended if proof of insurance is not provided within 15 days. If proof is not provided, MVD must suspend registration and plates, which cannot be reinstated until proof is presented. Insurers are required to report to MVD within seven days of any changes to customers insurance policies. This includes cancellation, new issue, nonrenewal or vehicle additions. ADOI enforces compliance with this requirement. After a hearing, it must fine insurers a maximum of $250 per day per violation and may suspend their authorization to do business in Arizona unless failure to comply was accidental or inadvertent. ADOI also authorizes insurers to do business in Arizona, licenses insurance agents, performs financial examinations of insurers, reviews insurer product and rate applications, and surveys market conduct. It has investigative, enforcement, and regulatory powers. In addition to imposing fines, it can accept or reject applications for new products and rates, as well as deny, revoke or suspend an insurer s authorization to do business in Arizona or an insurance agent s license. Law enforcement officers are required to check MVD s database for insurance and registration information and ask for proof of insurance at accident and violation investigations. Unless proof is presented, they must issue citations if the database does not show insurance or registration. STATUTES AND REGULATIONS Enforcement is governed by statute and regulation. Unfortunately, there are inconsistencies between the two. Inconsistent regulations are listed in the Conclusions and Recommendations section and described in the Appendix. 10

21 COMPULSORY INSURANCE LAWS Literature Review Liability insurance is compulsory in 47 states and the District of Columbia. In addition, 18 states require uninsured motorist coverage. Twelve states, including Arizona, have minimum liability limits less than or equal to $15,000 per person, $30,000 per accident. Figure 4 below shows the percent of states at different minimum per person liability limits. 3 $60,000 $50,000 6% $40,000 $30,000 $20,000 10% 14% 22% 48% $10,000 $0 Figure 4. Minimum Per Person Liability Limits Table 2 below shows the actual breakdown by state. Table 2. Minimum Per Person Liability Limits By State $10,000 $12,500 $15,000 $20,000 $25,000 $30,000 $50,000 FL, LA, MS, OK OH AZ, CA, DE, NJ*, NV, PA, SC* AK, AL, CT*, HI, IA, IL*, MA*, MD*, MI, TX, WV AR, CO, GA, ID, IN, KS*, KY, MO*, MT, ND*, NE, NH*, NM, NY*, OR*, RI*, SD*, TN, UT, VA*, VT* An asterisk (*) indicates states that require uninsured motorist coverage. MN*, NC ME* Included in both Figure 4 and Table 2 are the three states without compulsory insurance laws: New Hampshire, Tennessee, and Wisconsin. Although these states do not require insurance, they do require that motorists be able to pay minimum liability limits in the event of an accident. 3 Source: Insurance Information Institute; March

22 COSTS TO THE STATE OF UNINSURED AND UNDERINSURED MOTORISTS Motor vehicle liability insurance protects the public from the economic consequences of motor vehicle accidents. To the extent that it is sufficient to compensate victims, it protects policyholders from losing their assets to the people they have harmed. Without insurance, or without enough insurance, substantial costs are passed along to the public and the state. Total costs of motor vehicle accidents are very difficult to estimate, particularly noneconomic costs, which may be the most devastating for victims and their families. For seriously injured victims, the sudden loss of function and independence and the family s new role as caretaker both create considerable stress. Alcoholism, depression, divorce, dropping out of school, drug dependence, and suicide all can result from the emotional consequences of a life-changing injury. Injuries need not be life-threatening to be life changing. Disfigurement may not have serious medical consequences; yet have serious emotional and psychological consequences. Chronic pain can limit activities for years. Although pain and suffering are called non-economic costs, their effects can and do create economic costs for society. Policy makers should keep in mind that economic costs are not total costs. Both tangible and intangible costs should be considered when making policy. Economic costs alone are significant. The National Highway Traffic Safety Administration of the United States Department of Transportation estimated that, in 1994, economic costs of motor vehicle accidents in Arizona were $2.5 billion, for a per capita cost of $623, the 12 th highest in the nation. Of that, the report estimates that 40% of the cost was borne by the public; 46% by insurers; and 14% by other sources. 4 Forty percent would mean a $1 billion or $250 per capita burden on the public and the state. 5 The Arizona Department of Transportation (ADOT) estimates that, in 2002, economic costs of motor vehicle accidents in Arizona were $3 billion (rounding), for a per capita cost of $ If costs were distributed as in the 1994, NHTSA analysis, this would mean a $1.2 billion or $220 per capita burden on the public and the state. According to the Insurance Research Council, from 1995 to 1997, Arizona s estimated average uninsured motorist rate was 16%. This estimate (the IRC uninsured motorist rate) has been used throughout this report to enable comparative analysis with other states. Problems in estimating the uninsured motorist rate are described later. 4 Other sources include costs absorbed by health care providers or charities. 5 The Economic Cost of Motor Vehicle Crashes, 1994, Blincoe, Lawrence J.; National Highway Traffic Safety Administration, U.S. Dept. of Transportation Motor Vehicle Crash Facts for Arizona, Motor Vehicle Crash Statistics Unit; Arizona Dept. of Transportation 12

23 Multiplying economic costs by 16% gives a crude estimate of the economic costs of motor vehicle accidents in Arizona involving uninsured motorists: $481 million. Alternatively, using ADOT s estimate of 8% gives us $240 million. The importance of uninsured motorist coverage can be demonstrated by comparing two scenarios: one where no one carries uninsured motorist insurance and one where every insured motorist carries uninsured motorist insurance. Without uninsured motorist coverage, there is a 16% chance that there will be no coverage for a motor vehicle accident. If this were the case, $88 of the $220 per capita figure would be caused by uninsured motorists. Sixteen percent of the driving public would create 40% of the burden on the public and the state. With compulsory uninsured motorist coverage, the chance that there will be no coverage drops to 2.6%. If this were the case, $14 of the $220 per capita figure would be due to uninsured motorists. Sixteen percent of the driving public would create 6.4% of the burden on the public and the state. 7 These simple scenarios prove another point. Uninsured motorists cannot have caused the entire $220 per capita burden. In Arizona, minimum per person liability limits are not sufficient to cover estimated average economic costs for more than half of all people injured in motor vehicle accidents in the state. According to ADOT, the estimated average economic cost of a motor vehicle accident in Arizona in 2002 was $22,391. Table 3 shows per unit estimates for different losses. Figure 5 shows injury severity and frequency. Table 3. Estimated Average Economic Costs of Arizona Motor Vehicle Accidents Fatality $1,090,000 Incapacitating Injury $52,100 Non-incapacitating Injury $17,200 Possible Injury $9,800 Property Damage Only $6,200 7 For Bayesian probability diagrams, see Exhibit 1 in the Appendix. 13

24 Possible 47% Incapacitating 9% Nonincapacitating 44% Figure 5. of Injured Persons By Injury Severity Fatalities, incapacitating injuries and non-incapacitating injuries all have estimated average costs higher than minimum per person limits. This is before compensating family members for lost loved ones and before compensating injured accident victims for lost quality of life. Possible Injury 11% Property Damage Only 18% Nonincapacitating Injury 19% Incapacitating Injury 11% Fatality 41% Figure 6. of Total Economic Cost By Crash Severity If every Arizona driver were insured, but had just $15,000 per person bodily injury liability limits, injured accident victims would have a one in 10 chance that over 70% of the economic costs of their injuries would not be covered by insurance. (See Figure 6) 8 Clearly, the public and the state benefit when motorists carry uninsured motorist and underinsured motorist insurance, and excess coverage. INSURER PROFITABILITY, COMPULSORY INSURANCE AND UNINSURED MOTORISTS Traditionally, insurers have opposed compulsory insurance laws, claiming they do nothing to reduce the number of uninsured drivers. Typically, they do not raise the issue of profitability. While requiring liability insurance means insurers will sell more policies, it does not mean they will make more profit. 8 Breakdown of injured persons was calculated from ADOT data. 14

25 Insurers maximize profit from operations by raising rates, lowering loss costs, or lowering administrative costs. Competition, compulsory insurance laws, and regulation exert a downward pressure on premium price. Compulsory insurance laws do so by increasing pressure for rate regulation what government mandates, it tries to make affordable. The effects of competition and regulation on price are discussed later. Requiring liability insurance raises loss costs because even high-risk motorists must be insured. A 1990 New York Times article cited industry surveys indicating that most uninsured are young, unmarried men the group with the highest accident rate. 9 Administrative costs also go up because more policyholders mean more customer service and transaction costs. In the same Times article, Delaware s Commissioner of Insurance, David N. Levinson, accused the insurance industry of blocking more stringent enforcement measures against uninsured motorists. Along with consumer groups, he complained that: the industry is content to collect the total cost of the nation s automobile insurance from a decreasing pool of customers as a way to keep administrative costs down and profits up. The industry would rather collect $750 from you, $750 from me and nothing from a deadbeat who doesn t want to carry insurance, said Mr. Levinson. The industry doesn t gain anything by collecting $500 from you, $500 from me and $500 from the other guy ; it s $1,500 either way. 10 The article went on to say that insurance industry spokesmen acknowledged that insurers oppose compulsory insurance laws and some enforcement measures. But, rather than citing profitability as the reason, Shirley M. Nagelschmidt, spokeswoman for the Alliance of American Insurers, said: The industry does not want to be in the position of saying somebody must buy insurance before he feeds his children. 11 Limited by market and regulatory forces in how much they can charge for liability insurance, insurers have sought to lower loss costs through legislation that allows denial of coverage and elimination of non-economic damages. By targeting uninsured motorists, they have found legislative and public support. Several states have passed laws limiting or prohibiting recovery for uninsured drivers even for insured drivers under their uninsured motorist coverage. 9 Uninsured Drivers Create Other Kinds of Wreckage, decourcy Hinds, Michael; The New York Times; 9/3/ Ibid. 11 Ibid. 15

26 WHO IS UNINSURED? CHARACTERISTICS OF UNINSURED MOTORISTS A 1999 study by the California Department of Insurance found that uninsured motorists were more likely than insured motorists to have the characteristics shown in Table 4 below. Table 4. Characteristics of Uninsured Motorists 12 Home Ownership: Renter Income: Less Than $20,000 Age: 18 to 24 Education: Sex: Ethnicity: Stability: High School or Less Male Hispanic or Black Less Time in Present Home Findings were taken from a 1997 random telephone survey of 1,008 California vehicle owners, of whom 10% reported owning an uninsured vehicle. The survey s error margin was +/- 3% at the 95% confidence level. The author cautioned, however, that the sample may not have been representative or the results accurate, and that for these reasons, the survey was likely to create an incomplete picture of the uninsured. 13 An earlier survey of 400 households in Maricopa County, Arizona, showed predominantly female ownership of uninsured vehicles among all ethnic groups. Findings were based on just 38 households, however, and the survey did not provide a breakdown of respondents by gender so it may be that more women responded than men. 14 In the California survey, the number one reason for not insuring, given by 49% of uninsured respondents, was that the vehicle was not used or did not run. Another 30% chose Costs too much/can t afford as the primary reason they did not have insurance. 15 Of uninsured respondents, 58% owned a vehicle that was insured. 16 The study calls these vehicle owners hybrid uninsured, while those without insured vehicles it calls pure uninsured. Hybrids primary reason for not buying insurance was that the vehicle was 12 Characteristics of Uninsured Motorist, Hunstad, Lyn; California Department of Insurance; February 1999; p.2 13 Ibid.; p What We Know About Uninsured Motorists And How Well We Know What We Know, Khazzoom, J. Daniel; Journal of Insurance Regulation; Kansas City; Fall 1999; Vol. 18, Iss. 1; p Characteristics of Uninsured Motorist, Hunstad, Lyn; California Department of Insurance; February 1999; pp Ibid.; p. 1 16

27 not used or did not run (71%). 17 Despite this, 14% reported their uninsured vehicles were in daily use. Just 43% said their uninsured vehicles were never used. 18 The primary reason cited by the pure uninsureds for not buying insurance was due to the high cost of insurance (63%). They were also more likely than hybrids to agree that: auto insurance costs more money than I have (73% vs. 48%). Compared to hybrid uninsured, pure uninsured were more likely to be female, not employed, single, and speak a language other than English at home. 19 They reported concern about being able to find a place to buy auto insurance. 20 Dividing respondents into vehicle-not-used uninsured and costs-too-much uninsured, the costs-too-much uninsured were more likely to be single vehicle owners (72% vs. 6%). 21 A majority of uninsured and those who purchased minimum mandatory coverage had a high level of interest in a lower cost alternative policy that provided less coverage 22 and said they would probably purchase such a policy even if it cost just 10% less. 23 Coststoo-much uninsured were more likely to buy a low cost, low coverage policy (57% v 41%). 24 Yet when California offered a low cost, low coverage policy in June 2000, response was low. Today, just over 2,500 such policies are active. 25 Uninsured tended to own more vehicles than insured and were more likely not to have health or life insurance. They seemed to have less trust of insurance companies and saw themselves as the type of person who does not have insurance. An earlier New Jersey study found more affluent uninsured: 26 Table 5. New Jersey (NJ) Uninsured Motorists By Income Household income of NJ s uninsured Over $30,000 Almost 70% $40,000-$50,000 20% Over $50,000 16% 17 Just 11% of all uninsured respondents said that their vehicle did not run and gave that as a reason it was not insured. 18 Characteristics of Uninsured Motorist, Hunstad, Lyn; California Department of Insurance; February 1999; pp. 18, Ibid.; pp. 15, Ibid.; p Ibid.; p The policy would offer 10/20 limits as opposed to 15/30 limits. 23 Characteristics of Uninsured Motorist, Hunstad, Lyn; California Department of Insurance; February 1999; p Ibid.; p Survey results 26 Uninsured drivers warned to pay up, Donnelly, Joe; The Record; 2/5/

28 ESTIMATING THE NUMBER OF UNINSURED MOTORISTS When estimates are given of the number of uninsured motorists in a state, the bases for the estimates usually are not reported. Where more than one estimate is available, they often conflict. For any estimate, reliability is unknown. Insurers and states define uninsured motorists differently, based on different interests. Insurers need to determine when a claim is eligible for uninsured motorist coverage. States, on the other hand, need to determine when a person is subject to penalties for driving or owning an uninsured vehicle. These different head counts introduce noise into the data. For example, uninsured motorist claims include victims of hit-and-run drivers, who may have been insured at the time. Likewise, where both driver and owner are subject to penalties, states may count one vehicle without insurance as two uninsured motorists. An estimate popular with researchers is the UM/BI ratio, which is: UM/BI ratio = Uninsured motorist claims All bodily injury claims Yet industry sources of UM/BI are silent as to how, exactly, UM/BI ratios are calculated for example, whether attempts are made to compensate for inherent bias (such as removing hit-and-run drivers from the count) and, if so, what those efforts are. An economist for the Insurance Information Institute was quoted as saying that because about half of California s uninsured motorist claims involved hit-and-run drivers, it was impossible to say if the uninsured motorist rate taken from claims data was accurate. 27 In taking UM/BI as the uninsured motorist rate, the following assumptions are made: Insured and uninsured motorists are equally likely to be in an accident and are equally likely to be at fault. Claims arising in a state involve only residents of that state. Victims are equally likely to file uninsured motorist claims as they are to file BI claims. 28 If UM/BI is based on claims accepted rather than claims filed, then another assumption is that insurers are equally likely to accept UM claims as BI claims. Since UM claims are made under the policyholders own coverage, this may not be the case. Insured motorists carry UM coverage (not mandatory in Arizona). Insured and uninsured motorists are likely to be in accidents with each other in proportion to their representation in the population. 27 Pay at the pump isn t the solution, Richardson, Diane; National Underwriter; Chicago; Jun 8, What We Know About Uninsured Motorists And How Well We Know What We Know, Khazzoom, J. Daniel, Journal of Insurance Regulation; Kansas City; Fall 1999; Vol. 18, Iss. 1; p

29 Evidence suggests that, at least in some states, UM/BI produces a higher percentage of uninsured drivers than any other estimate. A representative of the trade association Personal Insurance Federation of California, claimed that, uninsured drivers are at greater risk for being in accidents and causing accidents than those who have insurance. 29 Without knowing what data this is based on, it is impossible to assess this claim. If based on UM/BI, which includes hit-and-run drivers who may or may not be insured, the conclusion is suspect. The American Association of Motor Vehicle Administrators (AAMVA) lists four methods of estimating the number of uninsured motorists in a jurisdiction: database, random sampling, law enforcement or crash statistics. 30 All focus on vehicles, not motorists. Each has drawbacks and none definitively establishes the number of uninsured in an area. The database method can only be used by states that require electronic reporting of insurance information and maintain a database that matches insurance information with vehicle registration information. In its simplest form, this method divides the number of vehicles insured by the number of vehicles that should be insured, then subtracts that number from 1 and multiplies by 100, to come up with an estimate of the percent of vehicles that are uninsured. Adjustments can be made to add in vehicles that are insured but do not show up as insured, due to erroneous or missing data. Because the database method relies on registration records for the number of vehicles that should be insured, it is subject to error from unregistered vehicles. Nonetheless, a study that looked at different methods of estimating the number of uninsured motorists concluded that of the major methods, only one, database matching, appears to offer the potential of yielding defensible results, provided the matching is done on an ongoing basis. The author recommended supplementing this method with a reliable method to estimate the number of unregistered vehicles driven without insurance. 31 Of the other AAMVA methods, the random sampling method consists of drawing a random sample of registered vehicles that should be insured and mailing a notice requesting insurance verification. Once information is received, it is sent to the carrier for verification. This method also depends on registration records and is subject to the same error. It is also subject to nonresponse error inflating the number of uninsured. The law enforcement method divides the number of driver records with convictions for lack of insurance by the number of driver records with all convictions, then multiplies 29 Calif. Commissioner blocks auto ins. surcharges, Anonymous; National Underwriter; Chicago; Feb 24, 1997; p Standardizing the Way We Measure the Uninsured Motor Vehicle Rate, AAMVA Uninsured Motor Vehicle Rate Working Group; American Association of Motor Vehicle Administrators; July, What We Know About Uninsured Motorists And How Well We Know What We Know, Khazzoom, J. Daniel; Journal of Insurance Regulation; Kansas City; Fall 1999; Vol. 18, Iss. 1; p